Human Decisions Toward Collective Aspirations

Emory's operating budget and institutional priorities

Michael J. Mandl

Executive Vice President for Finance and Administration

In one sense, an operating budget can be viewed as a snapshot. It should be much more. The measure and placement of resources are expressions of strength and weakness; growth, opportunities, and challenges; and institutional culture. The annual process of developing a budget can reveal collective aspirations and priorities as well as entrenchment and lack of will. If the process is engaging, open, and transparent, the power to determine much of the institution’s ambitions, resources available for priorities, and the required trade-offs lies with the faculty and deans. It is not the process alone, however, but also the human decision-making within it that shapes an institution.

“Responsibility Centered Management”

Emory University is not at either end of the financial management spectrum, from fully centralized to fully decentralized, in American higher education. At one end, there is the centralized collection and allocation of resources. All revenue flows to the central administration, which then issues expenditure budgets to the schools and other units. Princeton University largely operates this way. At the other end of the spectrum, each school within a university receives all and only the revenue it generates itself and is fully responsible for all of its expenses, including allocated costs—no intervention or investment beyond the revenue generated by the school, no cross-subsidies. Harvard University is often cited as the classic decentralized, “every-tub-on-its-own-bottom” example.

And then there is everything in between. Many of these models get lumped together as “Responsibility Centered Management” (RCM), generally a system that lends greater control of resource allocation decisions to deans and schools but also maintains a central pool to be invested in schools, programs, or initiatives. The underlying premise of RCM is that it entrusts academic leaders with more control, incentive, and responsibility for their programmatic development and financial resources—both revenues and expenditures—thus leading to decision-making more informed by academic needs, goals, and trade-offs.

For decades, Emory has employed a variant of RCM. While the process has evolved somewhat over the years, the following is a summary of how it currently works. The schools keep all revenues generated by their own activities: tuition, school-based endowment earnings, philanthropic support, sponsored research, clinical income, and so forth. Some additional revenue generated outside of the schools gets allocated to them and to other non-school based initiatives. The schools are also responsible for all their direct expenditures—such as faculty and staff salaries, program costs, financial aid, supplies, and technology—and a proportionate share of indirect expenditures captured outside of the school. These include libraries, information technology, human resources, research administration, academic affairs, finance, campus life, general counsel, development and alumni affairs, campus police, facilities, and utilities.

The idea with those “indirect costs” is to charge each school an amount that reflects its use or proportionate share of those services and support costs. While the principles and methodologies for allocating such costs generally remain consistent from year to year, the proportions are rebalanced annually as size and use shift. For example, all else being equal, if one school grows its research more than the rest of the university, it will be responsible for a greater share of the research support costs in future years. To calculate each school’s annual proportion of these central activities, the University Budget Office (part of the Office of the Provost, led by Senior Vice Provost for Administration Charlotte Johnson) applies a set of cost allocation metrics to the “cost pool,” the totals across all pools, then allocates to the schools based on the pre-determined metrics. This step is not the end but rather the start of a conversation between the Ways and Means Committee (WAM) and the deans of each school. The final level of expenditures is discussed and reviewed through several rounds before being built into the schools’ annual budgets.

While educational and research costs have traditionally required subsidization, the cost allocation system is not used to establish or manipulate cross subsidizations between schools. If an allocation statistic indicates a 20 percent share of a cost pool by school x, then 20 percent is what school x pays for. There are always some differences of opinion about the metric, level of expenditures outside of the schools, and/or resultant shares, but the process is always open, transparent, and iterative.

Human decision-making

The most substantive decision-making does not reside in cost allocations, although that process is important. Since there are never enough resources to meet all needs and desires, the real and most challenging judgments enter into the process when schools and central units must determine whether to offer new programs, how to generate additional resources, the appropriate expenditure level for a particular area, whether a reallocation of resources should take place, and what trade-offs should be made. Each school goes about this in different ways, some successful and some less so. In my view, our ambitions and aspirations for enhancing excellence should always exceed the current resource envelope; otherwise, wouldn’t we be aiming too low for Emory?

“Responsibility Centered Management” thrives when ownership—both academic and financial—is embraced at the school and faculty level, and when people, programs, and decisions are closely aligned.

The hard work of making decisions and trade-offs will therefore always be present. We might as well take collective responsibility for it. To be sure, while I serve as the executive vice president for finance and administration—with responsibility for campus services (campus planning, facilities management, parking, and police), finance/treasury, human resources, information technology, internal audit, business process improvement, and investment management—I am not the university’s chief budget officer. That role is designated to the chief academic officer—the provost and executive vice president for academic affairs.

I think it is important symbolically and substantively for the provost to chair WAM, which she does (see below). The resource planning and decisions that take place via WAM represent a close partnership among its members. We communicate and work well together, with Emory’s mission, vision, challenges, opportunities, and priorities as guides. Most importantly, we trust and respect each other—enabling tough discussions and differences in points of view. These same characteristics exist in the resource allocation process of the most successful units.

In an RCM model, the majority of the resources are in the hands of the schools: out of the 2013 all-funds budget, approximately 87 percent of the direct expenditures originate in the schools and other revenue-generating units, and 13 percent represents allocated costs from central administrative and academic support units. Even when you count all those costs as a percentage of only the unrestricted operating budget (for example, excluding grants and contracts), non school-based allocated and support costs represent less the 25 percent of the budget.

With the vast proportion of resources in the schools, all these individual budgets are brought together with those of the other units to form the overall university budget. Deans are charged with allocating resources within their school, and WAM works with the deans to fund institutional critical needs and priorities. The deans are also invited to attend the budget review sessions for the administrative units. We work carefully with the deans through multiple iterations to produce a budget proposal that ultimately goes to the Board of Trustees for approval. These are candid, open discussions. The committee listens to school-based plans, responds to assumptions, gives feedback, and tests the administrative cost allocations against each of the schools’ revenue outlooks. On that front, one goal of WAM is to keep administrative and infrastructure cost growth below the revenue growth in the schools.

Given the magnitude of resources that reside in the schools, it is important that budget planning be active, innovative, energized, and entrepreneurial. I believe budget planning and associated decision-making is most effective when it involves the faculty, with clearly articulated principles to guide discussions and decision-making. If faculty and their school leadership are engaged in ongoing and frank conversations about opportunities and challenges, then they become part of the process of determining priorities and aspirations and aware of the reality of trade-offs. And when faculty share responsibility for the process and its outcomes, the schools are more likely to excel—especially in periods of both evolutionary and punctuated change, such as those we see today in economic, social, and technological spheres.

Support from the center

One responsibility of WAM is to allocate non-school-based revenues, such as investment income from non-school-based endowments or strategic initiative funds (which received a large influx years ago from the central portion of the Emtriva HIV therapeutic monetization). How do we distribute these resources among the schools? The answer should be, of course, according to academic priorities and institutional needs. But it should also be informed by the opportunities available to each school and discernment of their success in seizing opportunities, as well as the constraints that might be beyond a school’s control.

For example, currently the vast majority of the ongoing annual central funds subsidize the activities of the arts and sciences—they are allocated to Emory College and the Laney Graduate School. This has always been the case, but in response to the economic downturn in 2009, when revenues from these central sources declined as a result of endowment losses and near zero interest rates, we re-directed income from several other areas and further concentrated it in the graduate school and college (with a small amount to Oxford as well). Despite this concentration, all of the schools saw declines in support due to the downturn. The reduction in interest rates alone reduced the investment income into these sources by close to $15 million—an amount yet to be recovered in the annual budget as interest rates remain near historic lows.

At the same time, all the schools have experienced increased demand for financial aid. In the case of Emory College, our commitment to need-blind admissions and meeting institutionally defined need have increasingly burdened the school’s tuition-driven operating budget. A student’s ability to pay for an Emory education is not considered when admission decisions are made, and two out of three undergraduate students receive some financial assistance, including loans (please see Assistant Vice Provost of Undergraduate Enrollment and Dean of Admission John Latting’s essay on page 10). Nonetheless, Emory, along with most of the other top twenty universities, has valued need-blind admissions as a core component of building the best educational experience. In the last eighteen months, WAM worked to bring a broader institutional plan to stabilize the effect of financial aid on the college budget. The multi-pronged solution included the admissions and financial aid offices working with the deans’ and provost’s offices. It also included fundraising success by the President, which led to a significant increase in endowment for scholarships. We also directed proceeds from the ground lease associated with the Emory Point development into a financial aid endowment for the college. Financial aid will remain among our highest fundraising priorities for the next several years. This is just one illustration of how multiple parts of the university can come together to address challenges from the external environment.

Semi-permeable boundaries

Another strength built in to Emory’s version of RCM is transparency. While there may be honest differences of opinion, there are no hidden “taxes,” and the cost allocation process is not used for cross-subsidizations. Our version of RCM aligns incentive and responsibility with the schools, rather than just with the central administration, but it also supports efforts that reside outside the school—to partner with the schools in addressing some of the more vexing challenges and to develop cross-school or cross-unit initiatives.

When faculty share responsibility for the process and its outcomes, the schools are more likely to excel.

While not an “every-tub-on-its-own-bottom” structure, our system respects boundaries between the schools to foster a level of financial responsibility and positive incentive, and to afford some protection from avoidable risk incurred by decisions in other schools. Those boundaries can also be a weakness, however, because they can discourage cross-school initiatives. For instance, without creative collaboration, a programmatically wise investment might not move forward for one school’s worry about not getting revenue associated with it. There are multiple ways to remove such barriers, but they require non-formulaic approaches and partnership. One approach is to seed such collaborations so that they can grow and later thrive on their own momentum. An example is the early support for cross-school programming in the Global Health Institute: initial funds were used to attract external program and research funding and to make faculty hires that were then phased into the school budgets over time.

New funding paradigms

Partnership and non-formulaic thinking are needed now more than ever. It is no secret that the traditional revenue streams for higher education—such as net tuition, federal research dollars, and clinical revenue to support biomedical research—are not growing as they have over the last several decades. What do we do? I think there are several exciting possibilities. One is the potential for technology and innovation to increase our capacity to educate more students—some on campus, some online, some through hybrid means. We are just beginning to see how that potential might play out at Emory with the new Semester Online consortium and Coursera. There is also something in these approaches to both enhance the value and potentially reduce the cost of on-campus programs, thus freeing up resources for new investment.

Another area holding promise is intellectual property, including drug discovery. Emory researchers are making tremendous strides in understanding human disease. As more of their work leads to new revenue from therapeutic or other forms of innovation, additional resources become available for core purpose.

A third area is further development and strength of philanthropic dollars. Currently, the Emory endowment is unevenly represented around the university, and a significant majority of it is restricted to school or purpose. New philanthropic funds supporting the work of faculty and new academic programs will be tremendously important as we go forward.

These and other opportunities will only succeed with the creativity, engagement, and energy of the faculty. Institutional leadership can help, but in a real sense of the phrase, “Responsibility Centered Management” thrives when ownership—both academic and financial—is embraced at the school and faculty level, and when people, programs, and decisions are closely aligned. Let’s work together to fully thrive.